This week, I want to look closer at an area of pensions which is certain
to continue to attract an increasing amount of attention and provide
endless interest and fees or commission for pension advisers not afraid of
a little additional technical detail, regulatory attention and,
Retirement income planning, until seven or eight years ago, consisted of
little more than a relatively simple assessment of the open-market option.
True, the adviser had to make sure they remained fully aware of the comings
and goings of leading providers in the market but, once this was
established, increases to the client's income of 25 per cent or more were
Then along came staggered vesting or phased retirement as it seems to be
more commonly known now. I have to admit that, all those years ago, I
struggled to come to terms with the idea of staggered vesting. As a
director of DBS at the time, I was tasked with reporting on an idea put
forward from one of the leading providers of the strategy.
The idea had been marketed to us as an entirely new type of retirement
income policy which would entail the clients of DBS members giving up 1 per
cent of their fund annually to gain the undoubted flexibility offered by
the strategy. Of course, it is now fully understood by most advisers that
staggered vesting is simply a computer program model of a strategy of
phased encashment of pension fund units. But the complex flexibility
Further investigation at that time of the potential market for staggered
vesting focused on the very small number of existing equity-backed annuity
options including (if my memory serves me well) two unit-linked and two
with-profits annuities. Strange that there has been very little increase in
the number of providers in this sector but more about this in the coming
weeks. It did not take long for the market to start looking for further new
and innovative retirement income products and strategies to broaden the
market away from conventional annuities.
In 1994, Equitable Life invented and launched the forerunner to what we
now generally know as income drawdown contracts. Its launch unfortunately
concentrated more on the tax avoidance scams than the real merits of the
contract for retirement planning and the Inland Revenue closed the
loophole. Sad, isn't it, that Equitable could not hang around longer to
reap the benefits of its innovative thinking?
It has taken us the best part of half a decade to start to fully
appreciate the huge potential advantages of income drawdown but I believe
we have not yet scratched the surface of its true attractions.
More recently – and this is a trend which I know is going to gather pace
significantly over the next few years – insurers have introduced further
variations on the theme of retirement income options although these have
yet to strike a chord with most advisers.
Where are we now? Well, almost inevitably, the wider range of more complex
annuity options has raised the need for a more professional and educated
approach to retirement income planning and this has encouraged close
regulatory attention justified by the undeniable shortcomings in the
quality of advice given by a number of intermediaries.
Increasing adverse publicity has and will continue to deter clients and
advisers from proper consideration of the valuable opportunities offered by
flexible and equity-backed retirement income options.
This is a great shame and, in this series of articles, I would like to
examine some of the main issues which should be considered by advisers and
brought to the attention of clients in determining an appropriate
retirement income strategy. I will start to identify how the process of
retirement income planning can be refined to ensure adherence to regulatory
Throughout these articles, I will concentrate on the three main risks of
flexible retirement income options – investment return, interest rates and
increasing longevity. The third of these main risks has, unfortunately,
been largely overlooked by many financial advisers in the past, ensuring
immediately a non-compliant sale (although not necessarily indicating bad
advice) and so I will look first at that issue.
The articles will not focus only on these risks as I will also be looking
at the attractions of alternative retirement income options, the main ones
being investment return, interest rates, death benefits and flexibility.
Charges will also feature prominently as we proceed.
First, longevity. People are living longer. The last published mortality
tables (PA90) related to mortality experience up to the year 1990. These
tables seemingly indicate that a retiring male, aged 60, can expect to live
around three years longer than the equivalent mortality tables published 10
years earlier (PA80) which themselves seemingly indicated a similar
improvement in male life expectancy. Female life expectancy, although also
increasing, fared slightly less well, indicating over each decade a
two-year improvement among females of retiring age.
Although we cannot yet expect to be provided with the next mortality
tables (I assume they will be called PA00), it is my understanding from
talking to a couple of leading insurance company actuaries that very
similar and continuing improvements in life expectancy will be evidenced in
the last decade of the millennium.
If this is true – and I have no reason to doubt the word of these
actuaries (other than because they are actuaries) – this would mean that
male life expectancy has increased by around 10 years and female life
expectancy by around six years over the last 30 years.
What is certain, as evidenced in medical journals, is that life expectancy
is continuing to rise, with most findings indicating that this trend is
likely to continue for the foreseeable future.
What has all this got to do with flexible retirement income options? A
huge amount, actually. Making retirement income recommendations in the
absence of an understanding of this trend is not only dangerous but is
certain evidence of non-compliant and bad advice to the client. It
therefore merits at least one article, starting next week.
Keith Popplewell is managing director of Professional Briefing